Oct 09 - In a new report, Fitch Ratings says that the high credit growth in sub-Saharan Africa (SSA) rated countries primarily reflects the expansion of the financial sector from a low starting point in a context of rapid economic development. This mitigates financial and macroeconomic risks that are often associated with high credit expansion.

Fitch's latest Macro Prudential Risk Monitor (August 2012), which aims to identify the build-up of potential stress in banking systems, highlighted rapid real credit growth to the private sector in a number of SSA countries. Among the 15 countries rated by Fitch in SSA, eight recorded annual real credit growth above 15% over 2009-2011, which triggered a macro prudential index (MPI) of at least 2 (moderate risk). These countries are Angola, Cameroon, Gabon, Kenya, Lesotho, Mozambique, Rwanda and Uganda.

Rising credit to GDP primarily reflects the expansion of the financial sector from a low starting point. The SSA median credit to GDP is 21.6%, even lower than the 'B' median (27.7%). Credit has been growing especially rapidly in countries where private sector credit to GDP is small (eg Ghana, Angola and Mozambique). Most SSA countries are low or lower-middle-income (GNI per capita below USD4,035) and need more, rather than less, credit to finance development. Poor access to credit is often cited as a key impediment to growth in business conditions surveys. The main constraints to credit expansion are low incomes, informal activity and weak institutions.

On the demand side, high credit growth has been associated with high real GDP growth. Before 2008, countries recording the highest GDP and credit growth were oil producers (Angola, Ghana and Nigeria), and Uganda and Zambia. Countries that have been assigned an MPI of 2 or more are also the ones that recorded a strong rebound in GDP growth after the 2009-2010 slowdown. Ghana and Zambia, which are both likely to record an increase in MPI from 1 to 2 at end-2012, are also benefiting from rapid commodity-led GDP growth.

Monetary policy has generally tightened in 2012, which should constrain credit growth despite limited monetary policy transmission to private sector credit conditions. Banks' lending policies have also become more conservative. The rise in NPLs in 2009/10 has been the trigger for reforms of the financial sector in some countries, including better risk management in Nigeria and more stringent lending standards in South Africa. Supervision by central banks has also improved following the global financial crisis.

Banks in SSA generally exhibit high capital ratios (median of 16.8% in 2011) and abundant liquidity (median loan to deposit ratio was 76.6%). Non-performing loans are contained (5.1% of total loans). Banks in SSA, with the exception of Nigeria, were resilient through the 2008/9 crisis thanks partly to limited direct linkages with the global economy. Cross-border liabilities are low (median of 3.6% of GDP) limiting external funding risks. The expansion of foreign banks has benefited banking operational techniques, such as loan origination procedures, through technology transfers. The importance of foreign ownership of banks (median of 64% of assets) limits the potential for contingent liabilities for the sovereign.

The analysis of potential risks is made more difficult by a lack of data on equity and house prices in a number of countries that have recorded credit growth above the 15% real annual threshold (Angola, Cameroon, Gabon and Rwanda). However, Fitch believes it is unlikely that those countries are facing a house or equity price bubble given the low level of credit to the private sector and the limited proportion of banks' credit directed towards households, especially mortgages, which further limits potential upward pressures on property prices.